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August 11, 2005

By Beth Piskora Even during his annual vacation, President Bush found the time to sign into law two wide-ranging bills affecting key elements of America's infrastructure. On Aug. 8, he approved the Energy Policy Act of 2005 -- the first comprehensive change in U.S. energy policy in 13 years -- which aims to promote more efficient use of energy, among other measures.

And on Aug. 11, he signed a six-year (2004 through 2009) transportation bill could increase government outlays on highways, mass transit, and rail systems by as much as $295 billion.

With all that taxpayer money sloshing around, which companies stand to gain the most? A number of industrial outfits are likely to benefit, according to Standard & Poor's equity analysts.

"MINIMAL EFFECT." Companies in the engineering and construction segment are likely to benefit from the new legislation, says Stewart Scharf, an equity analyst with Standard & Poor's. Scharf specifically cites two stocks currently recommended by S&P: Jacobs Engineering Group (JEC

; recent price, $60) and URS Corp. (URS

; $36), each of which carries an S&P investment ranking of 4 STARS (buy).

Jacobs should benefit mainly from increased highway spending during 2006 and 2007, according to Scharf, who says the uptick in spending is more likely in to occur in late 2006, when engineering work on new highways and road improvements will begin. Scharf sees most of the benefit starting in 2007, as Jacobs probably gets involved in the field work for new highway construction and upgrades to current road infrastructure. Although Jacobs garnered 16% of its revenues in fiscal 2004 (ended September) from oil and gas companies, Scharf expects the new energy legislation "should have a minimal effect on the company's business."

Scharf also believes URS should benefit from the transportation and energy bills, as they provide for planning and design, systems engineering, technical assistance, and construction management for various industries including surface and rail transportation, energy, and oil and gas. The company also serves state, local, and federal government agencies. In 2004, 48% of URS Corp.'s revenues were derived from federal agencies, while 20% came from state and local governments.

THE GOOD NEWS. S&P is less positive on two other companies that also seem likely to benefit from the new bills: Fluor Corp. (FLR

; $60) and Shaw Group (SGR

; $18). While Scharf sees Fluor as benefiting from both the energy and transportation bills, he is not recommending the stock, which is currently ranked 3 STARS (hold).

Scharf expects Fluor to garner new power awards for coal-fired plants, while the company also focuses on upstream oil and gas and clean-fuel and refining projects. The transportation bill should boost capital spending for Fluor's transportation-related infrastructure projects, according to Scharf.

"Fluor is already engaged in the business of helping energy companies develop cleaner fuels, a mandate that we think will be even stronger under the new energy legislation," he says.

THE NOT-SO-GOOD. However, because he expects future earnings growth to be "lumpy" as a slow ramp-up of oil and gas projects creates a lag in recognizing earnings in the early stages of projects, Scharf has a hold recommendation on the stock. He also sees a shift toward what he views as riskier projects in diverse and unstable regions of the world, including Iraq. Projects to rebuild that nation's infrastructure have softened in favor of military and security work, limiting near-term growth for Fluor, as the benefits from these new bills are unlikely to contribute to revenues before 2007.

Meanwhile, Shaw Group could see increased bookings for nuclear and emissions-control projects, along with oil and gas exploration and upgrades of coal plants, says Scharf. However, he believes the stock is overvalued, as he expects the company, which supplies industrial piping systems to refiners, as well as being involved in engineering, construction, and maintenance services, to be hurt by uneven bookings. He sees a long lag time for new awards translating into revenues and possible further project delays, and has a 2 STARS (sell) recommendation on the stock.

Glossary

S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:

A+

Highest

B

Lower

A

High

C

Lowest

A-

Above Average

D

In Reorganization

B+

Average

NR

Not Ranked

B-

Below Average

S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.

Globally

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

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Disclaimers

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